Yahoo! (NASDAQ:YHOO) has been a struggling stock over the past five years, especially because the stock has been on a bearish trend. If that was not enough, the much talked-about deal of being bought out by Microsoft was a failure. Management’s primary concern is not being able to regain its market share as more and more customers continue running to the more user friendly digital platforms that Google and Facebook offer. I’m talking about billions of dollars in advertising revenue being shifted from Yahoo! to its competitors as their customer base continues to decline.
Yahoo! Inc. has a current market cap of $18.33 billion and is currently trading around $14.78. During the last four months sales and income decreased 21.20% and 14.80%, respectively. In addition, revenue during the last four years has been decreasing at a compound annual growth rate (CAGR) of 8.81% while income has increased 25.79% during the same period.
Earnings per share for the trailing 12 months came in at $0.82 while AOL and Google reported earnings for the trailing 12 months of $0.12 and $29.76, respectively. In addition, its P/E is lower than its competitors'. In my opinion, this indicates the market is not willing to pay a premium to own the stock.
Yahoo has $2.06 billion in cash and short term investments and $134.91 million in long term debt, which means they’re not using debt to survive. Furthermore, Yahoo! has $1.2 billion in current liabilities. Compare that to the $2.06 billion in cash the company has. It does have enough money to pay off its debt. Yahoo’s balance sheet has 1.5x the cash necessary to pay off current liabilities and long term debt.
Competitor AOL Inc. (AOL) does not have enough cash on its balance sheet to cover its long-term debt and current liabilities. In fact, it only has $0.70 in cash for every $1.00 it has in debt and current liabilities. The other major competitor, Google Inc. (NASDAQ:GOOG), is in a much healthier cash position because it has 3.75 times the cash necessary to pay off current liabilities and long-term debt. Yahoo has $1.81 in working capital per share while AOL and Google have $3.13 and $134.95, respectively.
Yahoo has a current ratio of 2.86, which is a bit high and might indicate that management is not using cash very efficiently, unless they are secretly saving resources to launch new products, make acquisitions, pay down debt, or pay a dividend to shareholders. The quick ratio will give a better picture of the stock’s financial strength; even under the strongest test of financial strength, Yahoo has $2.56 in current assets for every $1.00 it has in current liabilities. Its debt to equity ratio is 1.08% while AOL and Google have debt to equity ratios of 3.05% and 7.23%, respectively.
On average, it takes 78 days for Yahoo to be paid on its receivables. For AOL it’s 51 days and for Google is 54 days. Yahoo takes a longer period to collect cash, meaning management can’t put that cash to better use such as paying off debt and expansion because it’s stuck in accounts receivable.
Over the last four years earnings per share have increased at a CAGR of 10.67%. Cash flow increased 22.50% during the last two years. However, the stock has been plummeting since 2006 and shareholders are discontent with their investment in Yahoo! stock. In addition, recent talks for a strategic tax-free asset swap deal with Alibaba may have come to an end. Yahoo owns around 40% of Alibaba Group.
It has been speculated by the media that the only valuable asset left in Yahoo is its stake in Alibaba, thus management is not likely to give away its goldmine. Alibaba's founder has tried to buy back the 40% stake from Yahoo; he has not been successful, at least not yet.
Yahoo’s management does not appear to be working in harmony on its specific long-term objectives because they take too long to make critical business decisions. Specifically, key executives appear to have a different vision for the company. Thus, I don’t think it’s an effective management team.
Although Yahoo’s financial situation is stable, its announcement of Scott Thompson as CEO could indicate internal changes and reorganization are more likely to occur, which can change its current financial position, which in turn will reflect in the stock price. An intelligent investor will understand that a stock with good financial strength but inefficient management is not a good investment. So far, the stock has deprecated 9.24% this year. I am recommending holding Yahoo for now, but would not take any positions in its stock at this time.
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